Person with having some money in hand and one Mobile app call himself entrepreneur and his/her Firm as NBFC these days in India . Lending seems to be too easy task .No one is looking into the bigger problem they are creating which will lead to future economic crisis in India. In this article we will consider some example to have deeper insight into this problem
Rahul who is small shop owner is enjoying cash credit limit of Rs. 10 lac from leading bank. He was paying his interest and turnover in his account was good . One day fin tech company PayTm came to his shop and installed QR code scanning device. It was very convenient for Rahul to receive money with the help of digital medium. Now PayTm started to offer business loan to Rahul . Rahul thought that he will expand his buisness with this loan and does not bother to his earlier lender which was bank. Now Rahul has two loan 10 lac from bank and 5 lac from PayTm. As you know NBFC always charges higher rate of interest if we compare them with rate of interest of banks. Now Rahul is overburdened . If there is any change in business like covid etc due to overburden his business will be badly affected and there are higher chances that business will close.
There is very simple rule while bank do there lending they assesses loan on based on some ratio like current ratio, Debit to equity ratio etc. which give them view how much loan is actually required by business to run it smoothly. But now NBFC has changed the game . assessment has no value now as Businessman is raising loan from all sources available without doing risk assessment . when everything is going good in business no body care .But if anything adverse happen in future it will lead business in debt trap and which lead to ultimate closure of Business and NPA Loan Account
Loan is not consumer product, you purchase it use it forget it, Loan must be repaid with applicable rate of interest. Easy way to raise loan without realizing repayment capacity of person lead to 2008 crisis in USA and same is building up in India.
A rush for loans can occur when NBFCs aggressively lend to customers without conducting proper due diligence or risk assessment. This can happen during periods of economic growth or when there is intense competition in the lending market.
To address the issue of bad loans, NBFCs must take steps to recover these loans through mechanisms such as debt restructuring, asset sales, or legal action. They may also need to improve their risk assessment processes and avoid excessive lending.
It’s essential for NBFCs to strike a balance between lending to generate income and managing risk effectively. Rushing to lend without proper risk assessment can lead to a surge in bad loans, which can have detrimental effects on the NBFC’s financial stability and the broader financial system. Regulatory oversight plays a crucial role in ensuring that NBFCs adhere to responsible lending practices and manage their loan portfolios effectively.
